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The progressive case for MMT

Lifting the veil of money

Economic Crisis

Image by Piotr Pawinski/123RF Stock Photo

Compared to the mainstream attention that Modern Monetary Theory (MMT) is receiving in the United States, it has been met with a more muted reception north of the border, particularly on the left. This is partially due to the perception that MMT is mostly concerned with disproving the need for taxes and that its promises of money for nothing are fundamentally dangerous. But this dismissive perception ignores MMT’s underlying theory and downplays its unique democratic and progressive potential.

At its core, MMT tries to illuminate the gap between what is possible—in terms of material productive capacity, and what we think we can afford—in terms of government budgets and deficits. The MMT project has been enormously successful in showing that these constraints generally do not overlap. In pursuit of this project, MMT is powered by two core theoretical ideas: sovereign money and functional finance. The first idea, sovereign money, focuses on the fact that the federal government is a currency issuer, not merely a currency user. In plain terms, the Canadian dollar is the creation of the federal government. As a result, its relationship to its own currency is fundamentally different from the relationship that local governments, corporations, or individuals have with the Canadian dollar.

Because it is the sole issuer of the currency, the federal government can never ‘run out’ of its own money. Sovereign states face no real budget constraints in running deficits, as they can create their own sovereign currency at-will. However, states face material constraints via inflation: too much money creation relative to productive capacity will generate a rise in price levels, as there is too much money chasing too few goods. From this perspective, taxation is needed to reverse excess money creation, rather than to ‘finance’ state spending.

To quote prominent economist Stephanie Kelton, “MMT is about replacing an artificial (revenue) constraint with a real (inflation) constraint.” MMT critics claim that this is simply a semantic contortion—with no consequence but to understate the importance of taxation in popular thinking. But understanding that taxation is an inflation offset rather than a method of financing government spending has concrete implications. Specifically, the ways in which government spending can or cannot become inflationary is deeply contingent on the nature of the spending.

Functional finance, the second core idea within MMT, argues that because governments cannot actually run out of money, their focus should be on the functional impact of policy—and not its budgetary impact. This means governments should undertake whatever combination of taxes and spending is necessary to ensure both full employment and price stability. In other words, governments should seek to balance the entire economy, not their budgets.

With this theoretical basis, the MMT framework provides an effective way of thinking about money and an intellectual toolkit for resisting dangerous economic discourses. The traditional perspective on public finance is singularly focused on ‘finding the money’ for government spending. Governments are likened to households in needing to financially ‘live within their means’ by first actually obtaining each dollar they spend either through taxation or borrowing before the money can be spent. Most coverage of public finance moralizes about the massive debts being left for future generations (such rhetoric almost never speaks of the environmental destruction that future generations will inherit). Creative concepts like the ‘debt burden per child,’ popularized by the far-right Fraser Institute, further entrench fears about government spending.

These narratives, focusing on the unfair debt burden being left for future generations, are a common motif in conservative rhetoric. Whether or not politicians use this language in a genuine or instrumental manner, it has a real effect on political thinking. Anecdotally, it is not rare to come across Canadians, including members of the working class, who interpret the federal government’s debt of $1.2 trillion as equivalent to a credit card bill that every future Canadian must actually contribute to paying off.

MMT scholars have been important in researching the plumbing of government finances in order to push back against this discourse. MMT’s focus on the actually-existing financial system stresses that debt, unlike CO2 in the atmosphere, is not itself a ‘thing’ but one half of a credit relationship, with wealth comprising the other half. The federal government’s debt refers to the bonds that it sells to the market. The vast majority of these bonds are owned by Canadian financial institutions like banks and pension funds. At the aggregate level, this means that the Canadian public owns the federal government’s debt.

Conservative rhetoric about “future generations paying off our debt” ignores this other half of the credit relationship; conjuring images of children burning money at the graves of their ancestors. In reality, future interest payments on outstanding government debt will be received by future generations. This is like a credit card bill where you also happen to own the credit card company. Future generations would also be inheriting the material legacy of what the federal government spends money on, such as a Green New Deal. Functionally, the federal government’s debt is an expansion on both sides of a balance sheet, increasing our national liabilities (future outgoing payments) simultaneous to increasing our national assets (future incoming payments).

The balance sheet expansion is even more pronounced when the Bank of Canada, the government’s own central bank, buys the federal government’s bonds. To quote the Library of Parliament:

[The Bank of Canada] records new and equal amounts on the asset and liability sides of its balance sheet, creating money through digital accounting entries. The federal government can then spend that newly created money in the Canadian economy as it sees fit, subject to Parliament’s approval.

Although most economists have always known that government finances are not analogous to a household,[1] this basic operational reality that the government can freely create money had been mostly ignored in public discourse—until MMT entered the popular lexicon. The only situation where a government faces a hard budget constraint, like a household, is if it borrows in a foreign currency. But with less than two percent of outstanding federal government bonds denominated in foreign currencies, this is not a major financial risk.[2]

The real constraint on government spending is that creating too much money will generate high inflation. After the 2008 recession, governments around the world engaged in a massive money-creation program known as quantitative easing. Despite ballooning central bank balance sheets, there was little effect on inflation. Clearly, the inflation constraint is much further out than the budget constraint. The debate over how much further out is where most interesting economic thinking is now happening. The recent rise in inflation is an example of the sophistication of this debate. As at least some of this inflation is rooted in infrastructural bottlenecks in the supply chain, government investment to alleviate these bottlenecks would relieve inflationary pressure, even if it meant more public debt. Therefore, the relationship between government spending and inflation is not unidirectional, it is contingent on what the spending is used for. This is in fundamental contrast with the simplified world of deficit hawks, where every additional dollar of deficit spending is considered dangerous.

Outside of the desiccated Canadian media landscape, where government finances are still likened to a household, much economic debate has implicitly adopted an MMT frame. Opponents of additional government spending increasingly focus on the potential inflationary impacts of spending, rather than exasperating spending proponents on how they are going to ‘pay for’ new spending.

Despite MMT’s success in shifting popular economic thinking, some progressive remain critical. But rather than challenge the underlying theory, much of this criticism is comprised of a general strategic anxiety about MMT. The progressive credentials of some of MMT’s founders are lacking and, as with any body of thought, its strategic implications are not always obvious. There is an overarching fear that it underemphasizes taxation and re-distribution. Skepticism towards the progressive loyalties of MMTers has led to skepticism about MMT’s claims. But this is a fundamentally dangerous way of assessing ideas. Fiscal conservatives may (incorrectly) utilize MMT to argue against new taxes, just as they may instrumentally use any of the left’s ideas in a given argument. This is an unavoidable part of political struggle. What genuinely helps in this struggle is having a more accurate understanding of how things work. With government financing, MMT provides this. Discomfort about who is on Team MMT or its strategic implications does not change its accuracy in describing government finances.

Additionally, the specific charges that MMT underemphasizes taxation and re-distribution are unfair. MMT regards taxation as the foundation for a sovereign currency’s dominance in a particular country. Taxation essentially forces individuals to hold and use the government’s currency. Without it, there would be an impossible coordination problem to resolve, as dozens of rival private currencies would circulate in the economy. Taxation is also considered the most important tool in confronting inflation. If government spending is like opening a tap, then taxation is the drain. Without the taxation drain, there would be an overflow of money relative to what the economy can productively handle, leading to rising prices.

With regards to re-distribution, it is important to note that giving poorer people newly-created money is still re-distribution. An absolute quantity of money corresponds to a relative amount of goods and services that it can purchase. Distributing newly-created money to the poor is a ‘redistribution’ in the share of goods and services they can purchase.

Perhaps most importantly, MMT is not a technocratic solution to a political problem, and it does not suggest central bankers printing money can end class conflict. In contrast, it politicizes a section of public life that was previously closed off to political contestation: money itself. By lifting the veil of money, it reverses a primary objective of the neoliberal project: ending “democratic money.”

Spurring on an understanding that the monetary system is not a technical matter that lies outside democratic deliberation is very important—and inspiring after decades of insulating money from democracy. This engagement is all the more necessary in the era of the weaponization of the global US dollar system, novel central bank policies, and new climate-ravaging digital tokens that masquerade as money. The democratic thrust of MMT, an accessible and rigorous framework for public engagement with the question of money (regardless of one’s credentials), will prove to be one of the theory’s most valuable contributions.

Roshak Momtahen is an economist and researcher. He tweets at @r_momtahen.

[1] T (taxes) and G (government spending) are separate independent variables in neoclassical models.

[2] And with a permanent and open-ended swap line with the American central bank, the Bank of Canada has unlimited access to US dollars.


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